Moneyball without the ball

Posts from the ‘Portfolio’ Category

Portfolio Performance

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

I’m back!

Its been a month and a half since I have written. I was on vacation for the last 3 weeks and before that I was so focused on learning about blockchains (and Overstock) that I didn’t have much time to put my thoughts down. I should get back to more regular posting going forward.

Overall, my portfolio is doing okay. I’m keeping up with the S&P, primarily thanks to Overstock. I have a high cash level, which hurts when the market is going up like it is, but I just can’t bring myself to larger exposure when the market seems so lofty. If the S&P keeps going up like it has been, and barring another Overstock type move in one of my small-caps, I will likely continue to struggle to keep up with the index. I’m okay with that.

Overstock

Since the last time I wrote the only big thing that has happened is that Overstock worked. After a big run up I reduced my position down to a more reasonable level before Christmas. It was simply too big. Its not very often that an investment causes me to lose sleep, but when Overstock was a 30% position, a level that is unheard of for me, it was doing that. I reduced too early of course, in the low-$70’s. I remain holding a more modest 5% position in the stock, which means it remains large, but not to the ridiculous degree it was before.

Apart from position size, I had a few other reasons for reducing Overstock.

First, after reading the offering memorandum for the tZero ICO, it looks like Overstock hasn’t started developing the ICO trading platform. So this is still early days.

Second, in that same documentation there was no mention of the stock lending platform, which I had been hoping for an update on.

Third, and I might be wrong about this because I’ve heard to the contrary, but it appears to me that the tokens are locked up for a year before they can be traded, which if true removes the upside of “price discovery”, or maybe bubble-discovery if you prefer, that I had been hoping for when the tokens became free trading.

Fourth, Byrne has been on the circuit giving interviews and his comments aren’t always consistent. I’m still not exactly sure what his plans are with e-commerce, yet I feel like at $75 the stock is pricing in some expectation of sale and a premium price. Take for example these comments. They were actually made after I reduced my position, but illustrate how uncertain the direction here is.

“Maybe it’s about time we stop seeing Overstock as two separate businesses,” he said. “Our retail platform had 40 million unique people come to it last month. So as we’re developing these blockchain applications, these blockchain companies, the retail business is an extremely valuable retail business to have in terms of bringing awareness and traffic to the blockchain properties that we anticipate developing.”

It doesn’t seem like the thing you would say if you were in the mid-stages of selling the business. So I’m not sure what to expect next.

Blockchains

More broadly, while I am very excited about blockchains and what they can do, I also think this is a long game and we are in the very early innings. I dedicated a significant amount of time over the last two months to blockchain research. I read books and a whole pile of white papers on individual companies. I think the opportunity is real, but it is mostly still in a very speculative stage where picking winners is hard.

I started to make some investments in the token space over the past couple of months. They have gone well, but mainly because the whole sector went crazy in December and not because of any particular insight I had. The token space is insane of course. It makes no sense to me that they have valuations in the $100’s of millions or billions of dollars when in many cases there isn’t even a platform yet. Moreover when you read many token white papers, the structure is often premised on a reasonable transaction fee that would seem to me to be negated by the current token valuations.

Nevertheless, the momentum could continue for some time yet. This is because A. there is a real value that will eventually be realized in blockchain applications, much like there was real value the internet in the 90s, so there is a basis for the enthusiasm, and B. the moves thus far have been mostly retail dollars and if even a sliver of fund gets involved in the next year the bubble should inflate further.

Apart from the tokens, I’ve been in and out of a few different blockchain related stocks over the last couple of months but I’m reluctant to mention them because they are generally pretty sketchy and you buy them for the single reason that you think someone else will buy them higher in short order.

Its all pretty insane. On the token side, let me just take Factom for example, which I pick because it actually seems like a solid platform and could eventually have all kinds of uses, it has backing and is established and it has an Overstock connection. It also has a $525 million capitalization for the token. If you assume that all of the economic benefits of the platform confer to the token holder, that means the platform is worth $500 million already? This isn’t a hit on Factom, they are really interesting and maybe someday when services use their platform to tie in mortgages and deed titles and stock ownership into their platform then that valuation will be reasonable, but man, $500 million? All these tokens are trading at multiples that suggest the platforms are mature and with robust usage. And we just aren’t that far into the game yet.

The irony is that the valuations perpetuate themselves. You end up trading on relative values and picking up “cheap” tokens that are in reality extremely expensive in their own right. I bought another token called Tierion because it seemed like a reasonable alternative to Factom at ¼ of the price. But its still a $100 million market cap for a platform with still limited utility.

It’s all pretty crazy, but I bet it has further to go before it ends.

On the stock side of blockchain the only one (other than Overstock) that I find somewhat interesting is Global Blockchain Technologies. The stock is expensive (around $175 million market cap at current prices), they provide only a fuzzy idea of what their assets are (crypto mining and a token fund) and they have a ton of cheap warrants outstanding that are likely keeping a lid on the price. So those are the reasons not to own it, or maybe to short it.

But I think there could be an interesting short-term play with the stock. The chairman of Global Blockchain is Steve Nerayoff. He seems to get a lot of flack on twitter, many think he’s nothing more than a promoter. They may be right. But he also happens to be a strategic advisor to tZero. In these two positions it would seem to me that Nerayoff basically has two responsibilities. A. to find tokens for Global Blockchain to invest in, and B. to help make the tZero ICO successful. So it seems like a reasonable speculation that Global Blockchain picks up a piece of the tZero ICO. News of the Kodak ICO investment (which is only about $2 million), briefly sent the stock up 45%. I have to think that similar news with tZero would be regarded with equal or even more exuberance.

Commodities

As I alluded to earlier I have been reducing exposure to stocks. Apart from a speculative blow-off its hard for me to add to positions with the market having run so far and with it being so long since the last correction.

However I have been willing to add to my commodity stocks. I continue to hold a number of base metal names, mostly those with ties to electric vehicles and batteries. I note that Largo Resources has had a nice run up, even after the company diluted shareholders once again at bargain basement prices. I also continue to own Lynas, Ascendent Resources, Leading Edge Materials, Bearing Lithium, Mkango Resources (very small position), Sherritt International and Norilsk Nickel. Ascendent Resources announced fourth quarter production numbers on Friday and while mixed, they are still making progress on the mine ramp. The stock is trading at roughly 4x free cash flow if they can reach their 2018 guidance.

Gold stocks have not done much of anything and interest in the miners must be at record lows. I’ve heard a few people articulate the theme that bitcoin interest is eclipsing gold and that the metal will continue to suffer as a consequence. I’m not so sure about that. Gold dynamics are so complicated, with factors from jewelry demand, Indian economics, Central bank proclivities and of course investment interest from individuals and institutions. I have found that trying to predict the direction of gold from any single thesis usually turns out to be wrong.

What seems to be the best predictor of gold and gold stock movements is sentiment. When everybody hates gold stocks, that is when they will go up. And vice versa. This is primarily what my thesis is here. Nobody wants to own gold stocks, so I think they will do well.

My largest gold stock position for some time has been Gran Colombia, and I really like the way the chart is setting up here. I think the agreements they signed back in the summer with the artisanal miners give a legitimacy to their business that they haven’t had in the past. If the market agrees with me the stock will go higher.

I have smaller positions in Jaguar Mining, Wesdome, Alamos Gold, New Gold and Orvana Minerals.

I also have a bunch of oil positions, though I’m a little more reserved about these. Oil just seems to have such a dismal longer term outlook to me. I know that the dominance of electric vehicles and renewable power is still a ways off, but I think its inevitable, and I wonder if it accelerates faster then anyone expects as the momentum snowballs.

But in the short term I doubt the market will look far enough ahead to care about that eventuality. Right now oil inventories are dropping and with oil prices at current levels, the stocks look pretty attractive. I still like the Canadian services names the best. The three I own are Cathedral Energy Services, Aveda Energy Transportation Services and Essential Energy Services. All of these companies trade well below book and have seen improving results over the past few quarters as oil prices have firmed. I would expect that to continue in the coming year.

On the producer side I still own Spartan, Gear Energy and InPlay on the Canadian side and Silver Bow and Blue Ridge Mountain on the US side. Blue Ridge Mountain is one of the few gas names that hasn’t moved at all over the past month. This is because it doesn’t trade at all. The company sold their Eureka Midstream interest in September for almost double of what the assets were held at on the balance sheet. In the process they reduced their operating costs, gave them more flexibility for drilling and freed up prospective land that had previously been tied up due to proximity to the pipeline. The company is now a pure play on the Utica/Marcellus. It’s got to be worth at least $12 or $13 if not much higher, given the run up in other gas names.

Other Stocks

Just some brief mentions of a few other names in my portfolio.

Aehr Test Systems had a good quarter and announced a new customer for their FoxXP test system. There is still a lot of selling pressure on the stock, pretty much every pop is sold. If you read through the third quarter conference call its hard not to come away enthused about their prospects. They have unique technology that provides a tangible efficiency benefit for testing many of the new components that are being developed. Its just a matter of bringing in more customers and building momentum. I’ve added to the stock on weakness in the last couple of months.

I’m still holding Mission Ready Services even though the company hasn’t announced its first PO yet. I came away from their December 7th conference call with many of my fears allayed, in that they seem to be building a legitimate business. The research I have done on the people they’ve brought on-board and what I’ve already described about the products (and technology) itself make me inclined to wait it out until the first order and hopefully some other good news. However, the stock is under pressure and probably will continue to be as long as there is no announcement and more existing investors get frustrated and leave.

Portfolio Composition

Click here for the last eight weeks of trades. Note that the prices below are as of Thursday, January 11th.

Portfolio Performance

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

So I’ve been doing so-so with the portfolio. I had a big bump up in September because of Helios and Matheson, and since then have mostly been treading water, a few winners and a few losers.

My online portfolio has actually done somewhat better than my actual one. This is primarily because A. By chance I held on to a larger piece of Helios and Matheson into the high $20’s and B. I’m fully exposed to the Canadian dollar fluctuations in the online portfolio and the Canadian dollar has fallen back below 80c of late.

I’ve still failed to outperform the market for the last 6 months, and that’s been frustrating. My outperformance in the near term is going to depend a lot on Overstock, which is my largest position right now.

I added around my oil positions as it seems more likely then not we will continue to see draws through year end. I find the Canadian service companies particularly interesting, mainly because they really look cheap based even on backward looking metrics but stand to benefit further from the price and volume increases one would expect are coming. I have mentioned Cathedral Energy before, and also like Essential Energy (with the recent positive decision on the outstanding lawsuit) and Aveda Transportation, which is quite levered and has a business tied closely to drilling.

I sold out of Klondex. I had reduced my position earlier and sold the rest after a pretty so-so quarter. On the other hand I increased my position in Gran Colombia, which is a frustrating stock for me because it raised guidance and continues to show good cash flow but has these towering asks day after day that keep the stock down. Gold has been crummy through December in the past but I am pretty excited about gold in 2018. I want to keep more than my usual weighting going into the new year.

I was pretty happy with the mining results of Ascendent Resources, Largo Resources and Lynas, though none have really done much since their reports. I plan to write something up on Largo in the near future. Vanadium seems to be catching some attention and Largo is the only way to play that. Largo had a really good day on Friday, but its volatile so I don’t know if there will be follow-through. Vanadium prices are firming up though. There was a good overview of Vanadium in this blog. I plan to write up my thoughts on Largo soon.

I was disappointed in Sherritt’s results and sold down my position for now. Similarly I didn’t like what I saw with CUI Global, particularly that the odorizer technology is not ready for prime-time. So I sold that one too. Smith-Midlands was disappointing and who knows when an infrastructure bill gets passed, so I’m out of that stock. I sold Lakeland Industries, though I might buy that one back in the short term. I sold the rest of Identiv, a bunch ahead of earnings and the rest after their dismal report. I sold Daseke ahead of earnings, which turned out to be fortuitous. And I bought and sold a company called Xunlei Limited, which I quite honestly lucked into when searching for blockchain companies. I really can’t wrap my head around what they do, so I didn’t stick around after some gains there.

So there’s more churn for sure. I’m going to try to be quicker to the sell button going forward. I think that I have been slow to sell for logistical reasons, and this has been a contributor to my poor performance over the last few months.

I’ve taken a few other small, new positions but nothing with enough conviction that I want to talk about them yet.

In fact that’s about all I want to say about the portfolio right now. Here is my portfolio as of Friday.

Portfolio Composition

Thoughts and Review

I have been on vacation on and off since the beginning of July, so my posting has been sporadic. I should get more regular again in my posting by the end of August. I don’t have good internet access and so I won’t be posting my updated portfolio until I get back.

I wrote a few weeks ago about my thoughts on the Canadian dollar. At the time, I was frustrated by the move but I did not see a fundamental reason for it to continue. I therefore concluded that I was comfortable holding onto my US dollar stocks and maintaining my US dollar exposure.

That turned out to be a poor decision.

The Canadian dollar has continued to rise. Its not the only currency to do so. I see similar moves from the Australian dollar, the Euro, etc. What we are seeing is broad based US dollar weakness.

Since that time I have become worried that what is happening has nothing to do with Canada. I’m worried that the strength of the Canadian dollar is because of a growing recognition of just how bad the US government is. That there is significant dysfunction that goes much deeper than the circus we see on CNN and Fox News.

There was an article published this week in Vanity Fair by Michael Lewis (the author who wrote Moneyball and The Big Short). In it he describes the transition from the Obama administration to the Trump Administration at the Department of Energy (DOE). Basically, the Trump team was uninterested in learning about the department, made no effort to replace key positions, and even 6 months into the administrations tenure many appointed positions have been left unfilled and policy directions unsaid. The DOE, to put it bluntly, is running on fumes.

If this is representative of how the Trump administration has approached governing as a whole, it suggests a large degree of dysfunction. Dysfunction that is deeply rooted into the core of the government departments that run the operations of the country. Who knows what this will lead to. It certainly does not give confidence in the country as a whole.

I remember that one of the things that Donald Coxe used to talk about was how you can’t have a strong currency with a weak government. Much of his assessment on the direction of a country’s currency was based on the political climate of the country.

We know that on the surface, the Trump administration has proven to be reality TV. But maybe behind the scenes things are actually worse. If it is much worse, then maybe the currency moves over the last few months are just the beginning. This move in the Canadian dollar is notable for its strength. It does not want to quit. I have learned that ignoring a very strong move in an asset class is unwise. It is often brought about by seismic shifts to the economic landscape that are fully understood only after the fact. I’m really worried that is what is happening here.

I regretfully reduced my USD exposure yesterday. I sold down a number of US dollar positions and converted those US dollars into Canadian dollars. I didn’t sell out of any position because there is nothing wrong with any of the stocks I own. So I reduced everything across the board so that I could turn those US dollars into Canadian dollars. The process was depressing.

I’ve always held the rule that if my portfolio falls 10% from its peak I will start to significantly reduce my exposure. This is my “2008 rule”. I won’t let 2008 happen again. In 2008 the first 10% down was followed by another 10% and so on and so on. Before I realized what was going on it was too late. To prevent this, I decided that at 10% I draw a line in the sand.

I have held to this rule a few times over the last few years. In 2014 when I was getting killed on oils. In January 2016 when I was getting killed on everything.

What is unique about this time is that its almost all currency. I’m down 9.5%, but a little over 7% of that is the Canadian dollar. Its depressing to see most of my stocks holding their own at levels similar to where they were 2.5 months ago and yet my portfolio is down significantly from that point.

But 10% is 10% and I have to do something about it. So I sold it all down.

Air Canada Earnings – out of the park

Air Canada released second quarter results this morning and they were well above anyone’s expectations. The company blew away second quarter EBITDA estimates, guided gross margins higher, and guided free cash flow for 2017 of $600 million to $900 million. The free cash flow guidance is up from previous guidance of $200 million to $500 million. Air Canada has a market capitalization of a little over $5 billion, so the new free cash flow guidance means that the stock is trading at 7x FCF based on the new guidance.

Combimatrix Takeover – finally some positives!

Its been such a frustrating couple of months. The Canadian dollar has been on an unstoppable march upward. My moves into oil and gold to hedge the exposure have had mixed results at best. Radisys laid an egg. But things took a big step in the right direction tonight as Combimatrix has been taken over by Invitae Corporation. From the news release:

Based on the Company’s current forecasts and estimates of Net Cash, and based on a fixed price per share of Invitae’s common stock of $9.49, the Company presently estimates that the CombiMatrix price per share received by CombiMatrix common stockholders would be between approximately $8.00 and $8.65.

This was a much needed win. Combimatrix was one of only a few US stocks that I didn’t reduce over the last few weeks. I’ve yet to sell my shares here. I may start to reduce them as they get to $8.

Radisys lays an egg

Radisys reported and it was not good. My thoughts are: A. I’m glad I sold down my position as much as I did, B. I’m less glad that I bought a little back a few days ago, and C. I’m wistful that I just would have sold the whole block back when they lowed guidance at the beginning of July.

Radisys reported second quarter earnings last night and the guidance for the third quarter was worse than the second quarter. Verizon has stepped back from DCEngine purchases for 2018 because of changes they have made to their subscriber structure that has pushed off requirements for more capacity.

Listening to the call, apart from the revenue headwind that occurs when your largest customers steps back for 6 months, the company moved forward in all other respects. They are seeing a material increase in engagements around CORD (central office as a data center), shipped for lab trials to a US Tier 1 which presumably is AT&T, closed on the “master purchase agreement” with the Tier 1 (again I assume AT&T) that they had alluded to in May, they were named systems integrator for a Tier 2 service provider in Europe, and they launched the new FlowEngine TDE and already have had a win with it in Europe. Overall they are up to 15 proof of concepts which is 5 more than they were engaged with in the first quarter.

But none of this is revenue generating in the immediate future.

I held onto Radisys too long. I’m generally good about selling a stock that isn’t working but in this case I was enticed time and again by the promise of a better future. I don’t think that Radisys management was being deceitful, I just think that being telecom equipment manufacturer is hard. I listened to a podcast of a seasoned telecom analyst who said as much. You get one time orders, nothing is recurring, and you are dealing with big, lumbering beasts of telecom companies that can move at a glacial pace and do not care how their erratic decisions impact you. Radisys is a casualty of this dynamic. I sold.

Selling Radcom

I also used the bump back over $21 in Radcom to sell it down further. I had been selling down Radcom over the last couple weeks. I have completely sold out of the stock in one of my portfolios and own a mere shadow of the position that it used to be in the other.

My thoughts on Radcom are related to valuation and timing. I’m worried about the market, and stocks that trade at extremely high price to sales ratios are particularly susceptible in corrections. Radcom reports earnings on August 7th, and I don’t expect that they will have any new contracts in place at that time. I wonder what happens to the stock if their next NFV win is delayed into the fourth quarter and in the mean time the market slides. I’ve decided I prefer to be on the sidelines to watch if that event plays out.

Empire Industries

I will write something more extensive on Empire’s quarter when I am back but the bottom line is that I am happy with it.

On the surface the lower sequential revenue, lower sequential EBITDA, is probably the cause of recent selling but I see a number of positives in the quarter that bode very well for the future.

First, the company generated over $6 million in operating cash flow, including cashing in $4 million from working capital.

From what I see, they paid down about $6 million of debt in quarter! I added up the numbers twice because it seemed like so much but if you add up bank debt and long-term debt it decreased substantially quarter over quarter.

Deferred revenue increased substantially from $10 million to $23 million sequentially. This is related to the big working capital influx. Revenue should follow shortly imo.

I don’t see how you can view the growing backlog as a negative. This is a construction business, size of backlog is directly related to future work. The doubling of the backlog is a huge positive imo.

Keep in mind this is a ~$40 million market cap company that just generated $6 million of operating cash flow for the quarter, roughly $5 million of free cash flow, and has doubled their backlog.

Hudson Technologies

Hudson was a mixed bag. They had a blow out quarter. But they forecast weaker volumes and prices for the third quarter. They also made a huge acquisition, of Airgas-Refrigerants. I honestly had trouble wrapping my head around all the data points, especially with limited internet and time, so I sold.

Hortonworks

Hortonworks had a blow out quarter and gave solid guidance. The stock rose significantly, which was nice. I sold out after the jump, which had more to do with my market outlook than any insights with the company.

Vicor

Vicor had a wait and see quarter. Revenue, bookings and backlog were all up, but less than I would have liked them to be. But the company forecast a much better third quarter and reiterated their guidance for a $75 million run rate by year end. I still really like the stock and it is on the of the few I hold in size.

What’s Left

The only positions that I have right now that are greater than 2% position in the portfolio are the following: Vicor, Combimatrix, Air Canada, Empire Industries and Americas Silver. Every other position I own is less than 1%. That kind of sums up where I stand right now.

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

The Canadian dollar has been a massive headwind for my portfolio over the last 2 months. I created a simple little spreadsheet to quantify just how much of a headwind it has been. Below I have recreated that spreadsheet but normalized to a starting amount of $1 million so we are looking at round numbers. Since mid-May the majority of my losses have come from the Canadian dollar.

The performance of my portfolio has been poor since mid-May. Stocking picking hasn’t been great, and I am down 3.7% over that time. This isn’t totally surprising to me. I had a big run in the months after the US election and had wondered when the inevitable pull back would occur. What I didn’t expect was that the pullback would coincide with a huge currency headwind.

The rise in the Canadian dollar has taken place as oil prices have fallen. This has made the move particularly painful. In the past I have been able to offset Canadian dollar gains by trading oil stocks that have tended to rise along with the dollar. Not so this time. Oil stocks have mostly fallen along with oil as the dollar has risen. On Friday the Canadian dollar was up almost a full percent even has oil traded down over $1/bbl.

Scott Barlow, who is a writer at the Globe and Mail, had an interesting piece on the Canadian dollar a couple of years ago. In it he pointed out that there was a strong correlation between the Canadian dollar and oil, which is not surprising, but also an even stronger correlation between the Canadian dollar and the yield spread of the US 2-year Treasury and the Canadian Government 2-year note. He presented the chart below.

While the Canadian dollar/oil relationship has went out the window over the last two months, the yield spread relationship has not. Below is a table taken from the Financial Post website that shows Canadian and US Government bond yields. I tried to find a chart to update the one above but could not. Nevertheless, looking at even just the last 4-week data in the table, its clear that Canadian yields have risen substantially while US yields have only risen modestly. The spread has risen from -0.592 to -0.236.

Comparing that to the historical spread chart from the Globe, we can see that a spread of -0.236 is pretty much in line with a Canadian dollar in the 77-78c range. In this context the move in the Canadian dollar is no surprise. The dollar is just moving along with yields.

The other factor at play right now are the short positions. I read back in May that Canadian dollar short positions were at an all-time high. It worried me, but I didn’t react to the news, incorrectly assuming that the short covering might send the dollar up a couple cents and I could handle the blow if it occurred.

We aren’t quite at a level where the Canadian dollar is overbought. The net position remains short. It is still larger than it has been over the past year. But much of the froth has been worked off.

The last consideration is what the Bank of Canada is going to do. The rise in the dollar has coincided with hawkish comments from the Bank of Canada. The market is now 95% convinced there will be a rate hike this week.

So it seems like much of the coming rate hikes has been (painfully) priced in. The rise in the Canadian 2-year yield has been 43 basis points. This pretty much prices out the 50 basis points of rate cuts expected this week and in October.

I would think that for spreads to rise further there would have to be evidence that the Canadian economy is actually stronger than the US economy. While the Canadian economy is showing strength at the moment, so is the US. The jobs numbers in Canada were strong (though a lot of it was part time work) but so was the jobs number in the US. Historically, the only times that the Canadian economy has outperformed the US economy were during times of commodity price strength. This isn’t one of those times.

Meanwhile so much of the Canadian economy is being driven by housing right now. I know many will disagree with this, and I know I have been wrong about this for some time, but I still do not think this is healthy and I do not think this is going to end well. I read over the weekend that transaction costs on housing make up 2% of Canadian GDP. That seems incredible to me. It is but one example of how important housing, and buoyant housing prices, have become to the Canadian economy.

There was an interesting BNN interview last week with John Pasalis, president at Realosophy Realty. Pasalis said that over the last couple of months the “Toronto housing market turned on a dime”. June home sales were down 37% year over year and prices declined 14% from the April peak.

I am sure that the response of the housing bulls is that this is just another buying opportunity, and they will point to Vancouver, which quickly recovered from its dip last year. Maybe so. But what is going on in housing has every earmark of a bubble. When I read about the foreign ownership, about the domestic speculation, and about prices exceeding traditional metrics of income as debt piles up, it sounds so familiar to other speculative bubbles I’ve read about. I’ve read Extraordinary Popular Delusions and The Madness of Crowds multiple times, as have I read Manias, Panics and Crashes multiple times. All of the lessons I tried to learn in those book rhyme with what I read about Canadian housing.

I have no idea when Canadian housing plays out in the way I expect it to. But being short the currency of such a bubble does not make me lose sleep at night.

Could I lose more because of the Canadian dollar? Most definitely. I can see a path to 80 cents. There are more shorts that need to be unwound. If the Bank of Canada raises rates and strikes a hawkish tone this week, the market will likely push the dollar up.

But I am not going to try to trade this for a couple of cents. My belief is that the only thing that is going to move the Canadian dollar sustainably higher is higher commodity prices. If we get those, then the stocks I own should more than compensate me for any rise. Unless that happens I will take the lumps that I am getting from this move, try to focus on maximizing the performance of the stocks I own, and not focus on what the short-term movements of the dollar are doing to my portfolio.

Portfolio Changes

I’m going to be brief with my transactions this last month and a half.

Radisys has been a disaster and I have reduced my position some in my actual portfolio but I have not in the portfolio tracked here. As usual I was a bit slow to the trigger with the online portfolio and by the time I got around to it the stock had sunk to a level that I believe is too low, even given the reduced guidance and lowered debt covenants.

What led me to reduce my position were the changes to the credit agreement amendment that they filed. There was a change to EBITDA, which was consistent with the change in guidance and therefore not unexpected. But there was also a change to the expected restructuring charges in the second and third quarter. Total TTM restructuring costs are expected to be $9.5 million by the end of the third quarter. This compares to $1 million in the previous amendment. I’m a little worried what precipitated this and until the earnings call, its impossible to know. If this is restructuring of the legacy business, then no problem. If its something to do Software Systems or DCEngine, that would be bad. And until we get to earnings, we won’t know.

With that said, the credit agreement also implies decent revenue in the third or fourth quarter. Below I have recreated what their minimum EBITDA covenants, which were just amended in the new agreement and therefore presumably at levels that management is comfortable with, imply about the third and fourth quarter.

They are still predicting a revenue ramp, albeit not as significant as they had been suggesting previously.

At $2.75 the stock is kind of in no man’s land. It seems too low to me to sell (its essentially back to the level it was at before they even had Verizon as a customer). However I find it impossible to be a buyer until there is some clarity around the restructuring and what constitutes the delays.

The other portfolio change that I will mentions is that I added a few gold stocks, Klondex Mines, Argonaut Gold and US Gold (which I already wrote about here). I like how beaten up the junior miners are, and I will write something up shortly describing how changes to the GDXJ have impacted these stocks. Apart from that early in the month I sold out of a number of names which in retrospect, for the most part at least, turned out to be a mistake (GIMO, ATTU, SUPN, SIEN, BVX and OCLR) as many of these names are higher now. I would have been better off selling Radisys!

Portfolio Composition

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

April and May have been frustrating months. My portfolio has been down about 2.5%, which isn’t terrible, but as the market has kept moving to new highs it has felt quite a bit worse.

Looking at the performance of my individual positions, I would attribute my under-performance to the following themes:

Investments in sectors that are doing poorly

Companies that have exciting potential but its still not showing up on the income statement

Upside exhaustion

On the first point, I’ve had positions in oil and gas and biotech, and these sectors have been somewhere between lackluster and dismal. Regarding oil, its been a tough time to own Journey Energy, Zargon Oil and Gas, and Vaalco Energy. Each has performed about as poorly as every other oil and gas name. I’m reluctant to cut these stocks loose though, I think each is cheap based on current prices and I’m not really in the camp that thinks we are heading back to $30 oil for any significant time. And as I’ve said before, if we do, the Canadian dollar is going to collapse, which will more than “hedge” any oil exposure that I have.

My biotech positions have been similarly crummy. Eiger Pharmaceuticals is the poster boy for this, having declined from $11 to under $7 in the last few months. I’ve held off adding to Eiger up until last week, when I put in some bids in the high $6 range that got filled. I am looking at a few other biotech names that I am looking to add on weakness.

Likewise, the performance of Novabay and Bovie Medical has been dismal. I sold Bovie Medical after their first quarter results and a conference call that I just didn’t find inspiring. Novabay, on the other hand, I feel more constructive about. The stock is down to an enterprise value of a little over $25 million (or was as of the weekend when I originally wrote this). The company is guiding to sales of $18 million for 2017, which is 50% growth over the $12 million in revenue for 2016. It seems like the stock is being crushed off of a notice of deficiency from the New York Stock Exchange. It’s a very low volume pull-back, which suggests it a couple of folks getting spooked out. It doesn’t seem like a big deal to me? I’m sure they will resolve it.

On the exciting potential but still not revenue bucket we have CUI Global, RMG Networks and Radisys. Radisys hasn’t done terribly, its about the same level it was in April (which is not really a positive thing to say), but RMG Networks and CUI Global have both been crushed. RMG Networks needs to get some of these trials and engagements contributing to revenue and until they do I’m not going to be buying the stock. I’m still wary of this name; it could pan out in a big way but it seems like there is a lot of hand waving about what’s to come that has been going on for a number of quarters now. I’m waiting, but not as patiently as I once was.

I added a position too soon with CUI Global. I bought the stock after some very weak results in the low-$4’s but that hasn’t proved to be even close to the bottom. Fortunately I only bought a little, and have subsequently added at $3.70 and again at $3.40.

I have some conviction that CUI Global has the technology to generate significant revenues over time and that its just a matter of time before we see those materialize. In particular, one day they are going to see the regulatory issue that their customer Snam Rete is having that is preventing installations get resolved, and when it does the stock is going to pop big-time. I noticed there were some small insider buys at the $3.40 level so I’m not the only one who thinks this is a decent value here.

As for the third theme, I had great runs from Combimatrix and Identiv and they simply ran out of legs. I continue to hold both, believing their momentum will resume after this breather.

I took new positions in Sito Mobile and Psychemedics this month and have already written about both. There are a couple of others that I will try to write about shortly. I also reduced my position in Medicure, which I talked about here, and exited my positions in BSquare and Versapay.

Neither Versapay or BSquare have shown me that they can convert their leads into sales. Versapay announced another quarter of decent growth on a year over year basis but still very low revenue on an absolute basis. They are not cheap on a multiple of revenue. BSquare isn’t gaining traction fast enough for my liking with its DataV product. The company recorded no new bookings in the first quarter and their DataV backlog declined from $5.7 million to $3.2 million. I’m actually a little surprised both stocks have held up as well as they have after what in my opinion were somewhat lethargic quarters.

Portfolio Composition

Portfolio Performance

Top 10 Holdings

Thoughts and Review

In my June update I took space to describe some of the attributes of my edge. At that time I didn’t define it specifically, and so I wanted to extend that discussion here. To repeat the definition that I put forth back then:

An edge is essentially the advantage that allows you to beat the market more than it beats you. For many of these traders understanding their edge; a system, a pattern, a money management technique; has been a major step toward consistent success.

I think I have put up enough years of out-performance to tentatively conclude I have some sort of edge. Its still possible that I don’t; maybe I will blow up yet and these past years will prove to be a statistical aberration. But as times goes on those odds become less likely.

So what is it?

First, I do quite a bit of research. Now maybe I’m not the most exhaustive researcher; I know some folks that will, at minimum, read through the last 5 years of 10-K’s before pulling the trigger, but nevertheless I am on the heavy side of the research spectrum. I think its fair to say that I make decisions on a more informed basis than the average investor.

Second, I’ve come up with a methodology that works, both absolutely and for my personality. I take small positions that let me be wrong without losing a lot of money. I rarely add to those positions if they fall and sometimes cut them if they fall too much even if I have no news to suggest anything has changed. And I add to the positions as they rise and price movement reinforces the thesis.

This works for me because in the real world I’m not very good at making decisions. Just to give a couple examples from every day life, I don’t like having to choose the TV show we watch at night, what food we will have for dinner, or where we are going to go on vacation. I would rather have someone else make the decision and just go with the flow. I am fortunate to have an understanding wife.

I invest in a way that is in tune with this nature. I rarely commit to an idea unless I am deep into it. Even with my biggest positions; Identiv or Combimatrix or Radcom, I don’t feel sold on the ideas. I’m more of a renter. I am not sure if they will pan out and I am ready to run if something goes awry. It’s easier for me to pick a stock then what’s for dinner because I know it’s not for good.

The final element of my edge is the type of stocks I look for. I try to find companies that, while they may only have a small probability of going up, have the chance to go up by multiples if things play out in a certain way.

To put it another way, if I am right 30% of the time and on average my gains are 20% and my losers are 20%, I am going to lose money. But if my gains can be 100% and my losers 20% then I am going to do quite well even if I’m wrong most of the time. So I am wrong a lot, I change my mind a lot, but when I’m right its often for a double, a triple or even more.

What I did last month – Aehr Test Systems

Its actually been 5 weeks because we were on vacation for the last week and so I didn’t get this update out on time. Even with the extra week, I didn’t do too much. In fact I only made three trades. One, Catalyst Biosciences, was a fluke that I discussed in my last update. The stock is back down to where it was and I didn’t actually buy it anywhere but the practice account so who really cares.

The other two were new positions. The one I’m going to mention in this update is Aehr Test Systems. They are a fairly tiny company ($90 million market capitalization) that makes testing equipment. They have a unique design (I don’t believe there is a lot of direct competition) that can test at the wafer level rather than the module level, which eliminates much of the potential for mechanical failure and improves quality controls. They started selling a multi-wafer testing machine called the Fox-XP system back in July and they have started to see orders come in. Their test equipment is sold to some large companies, like Apple and Texas Instruments (Apple and TI accounted for 47% and 32% of revenue in 2016) and they have made references to being in talks to sell product to a Korean firm that seems likely to be Samsung.

The stock doesn’t appear cheap at a glance. Revenues in the last 9 months were only about $12 million so on a trailing sales basis the stock looks wildly overpriced.

What makes it interesting is that we are only starting to see orders for the Fox-XP system. So far these orders have been for prototypes to verify the concept. The units sell for $4 to $5 million, so even a trickle of prototypes are incrementally material to the company. But the orders could scale substantially if the proof of concept testing goes well. The company doesn’t give a lot of guidance, and there isn’t much of an analyst following to prod information out of them, but on the third quarter conference call management said that if successful with their lead customer (probably TI?) they could ship 10 systems a program and that they are currently working on 2 programs. So the lead customer alone could amount to a $40 million to $60 million opportunity per program.

If the Fox-XP takes off, the stock is going to move significantly. Will it? I don’t know. It has a chance though, and that is worth a small position.

The dangers of short-term funding

In October of last year I wrote that I was short Canadian alternative lenders and mortgage insurers in the wake of the Federal government mortgage rule changes. For 5 months these positions did poorly. I began to think my puts would expire worthless and my shorts would be tax loss candidates. But last week the bet was vindicated as I took profits after the alleged fraud at Home Capital.

My thesis was not premised on the discovery of fraud. I thought there was a reasonable chance something would be uncovered as the market unwound but that wasn’t my primary reason for going short. Instead I thought the measures the government put in place in October would finally cool down the housing market and that, given that many of the measures were targeted at alternative lenders and insurers, these companies would suffer the most.

That hasn’t happened, so in that way I was lucky. But what I did get right was how things would unravel once the ball got rolling.

It cannot be overstated how precarious a company is if they lend long, borrow short and have a funding source that is easily called away. If any uncertainty develops about their lending book, the run on funding can be swift and fierce.

The collapse of Home Capital was precipitated by their dependence on high interest deposits to fund part of their loan book. Those deposits were available on demand, so at the first allegation of wrongdoing, many were pulled. Why not? Who wants to take a chance with their money for an extra percent. Adding to this outflow, there is and will continue to be a slow motion run on their GIC funding, many of which will mature over the next year and almost assuredly not be renewed.

This capriciousness is why I don’t have the stomach to hold non-bank financials through any bouts of turmoil (think back to New Residential or Northstar). You just never know when the funding side is going to tighten, and when it does an extremely profitable business model can be flipped to insolvency in a heartbeat. Again, and I know I’m repeating myself, but I don’t think you can over-state how precarious it is to lend-long, borrow short and have funding callable on demand. Everything is great until it isn’t, and then it’s all over.

As for the Canadian housing market, it continues to tick on. It will be interesting to see how the events of the last week interact with the price rise of homes in Southern Ontario and coastal BC. We are all familiar with how the US played out. There the topping out of prices was the catalyst that collapsed the loans and tightened of credit. I wonder if it has to play out that way, or whether causality could be reversed in Canada, as lenders for marginal buyers lose their funding sources in the wake of Home Capital?

We’ll see. We sold our rental property a few weeks ago so I don’t even have that chip in the game anymore. However that wasn’t driven by macro worry; instead we realized that renting is very time consuming and not very profitable (unless you live in the GTA or the coast and your house can appreciate in value by 30% in a year). Our last tenant also turned out to be a convicted criminal which didn’t help my stress level last year.

It will be another interesting week.

Portfolio Composition

Click here for the last five weeks of trades. I had to make two adjustments to the portfolio that show up as trades because of name changes that weren’t automatically updated in the practice portfolio. Accretive Health recently changed their named to R1 RCM and a while ago Limbach changed their symbol to LMB. The Limbach situation was brought to me by a reader. Its been wrong in my update for a while (displaying the old symbol and last traded price of it). This has been corrected now.

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

No great insights this month. My portfolio continues its upward climb even as the market stalls. I continue to be buoyed by my large position in Identiv and more recently my large position in Radcom. Combimatrix is consolidating in the $4’s but it looks healthy and I am hopeful it will break out on another leg up soon. Silicom has helped a lot and I will talk more about that shortly, as has Supernus. I still have a bunch of stories that I think are on the cusp and waiting for that final catalyst, Radisys, Vicor, and maybe even CUI Global, which I wrote about a little earlier this week. Overall, no complaints.

New Position: Daseke Inc.

I added a new position in Daseke after reading this write-up by Dane Capital. The story seems pretty straightforward. Daseke is born of a special purpose acquisition company (SPAC) that acquired the previously private company, its trading cheaply relative to its peer group (see chart below from their presentation) and is in an industry that should see a tailwind as economic activity, infrastructure spending and oil and gas capex pick up. There is not point repeating what Dane Capital already wrote so I recommend going to the article for the details.

I added both warrants and shares. I’m not really sure whether the warrants are fundamentally overvalued or undervalued compared to the shares, I just thought they represented a good upside given that the stock is probably around two times EBITDA lower than it should be and that if it traded up to an appropriate level it would get to the high teens, which would be a triple for the warrants.

What I added to

I added to four companies over the past month. In each case I was persuaded by an upbeat outlook about the future that was given by management on the calls. I’ve already written my thoughts on Vicor. Likewise I wrote up CUI Global just the other day.

I also added to Accretive Health, which has changed its name to R1 RCM. I last talked about R1 RCM here. Not much has changed, they are making progress on-boarding Ascension and finally moved their stock over to the NASDAQ. I figured the NASDAQ listing would be a bit of a catalyst, so I added the day prior to that.

Finally I added to Silicom on this news. This is just a huge contract for the company with an $17 million initial purchase order and $30 million expected annual run rate. I read somewhere that the customer is likely with Gigamon.

I do intend to write-up Silicom, I just keep getting tied up with other stories, and I wanted to spend time understanding their whole product suite before putting any post up. The good news is that as I have dug more, I have become even more comfortable with the company.

What I sold

On the sell side of the ledger, I already wrote about my sales of Nuvectra and Rubicon Project, and my reduced position in Bovie Medical.

In addition to these names I also sold the last of Willdan Group. Willdan has been a great name for me. I added the stock in the single digits, around $8, and am selling the last of my shares in the low-$30’s. The business is still humming, and the company seems to have shifted to an acquisition strategy that so far is fueling further growth. Yet at this price I just feel like the upside is priced in, with the stock trading at 25x the upper end of their 2017 guidance (which is $1.20 diluted EPS).

A couple late Biotech Buys

I also bought starter positions in a couple of mid-stage biotechs at the end of last week: Eiger Pharmaceuticals and Inotek Pharmaceuticals. I got both of these names from Daniel Ward, who comes up with a lot of good ideas. I’ll try to write up some details on both companies in the near future, but you can get a pretty good overview of the investment thesis if you listen to their recent conference presentation (Eiger at the BIO CEO and Investor conference and Inotek at the Cowen Healthcare conference).

The Catalyst Biosciences Catastrophe

Finally there is Catalyst Biosciences. This is so painful. So on Friday I put in a market order for Catalyst in the practice portfolio. I always use market orders with the practice portfolio because it doesn’t always work to put in limit orders. With limit orders sometimes you get filled, sometimes you don’t, even if the stock moves below your limit. But because I didn’t like the bid/ask spread on Catalyst (it was something like 5.20/5.45 at the time, so really big), and because the stock bounces around a lot, in my actual account I put in a limit order at 5.10. I liked the stock because it was at a big discount to cash, but it didn’t seem like there was any reason to chase it.

It was with great pain that I watched the open this morning. Catalyst opened in the $9’s and proceeded to move to as high as $18. I made a killing in my practice portfolio (its not reflected in the update because this update is for the four weeks ended last friday) but I made nada in my actual account.

I hate, hate, hate limit orders. I rarely use them and this is a big reason why. If you want to buy a stock, buy it. If you want to sell it, sell it. All the pennies I may save putting in limit orders over the next year will not amount to what I should have made on Catalyst today. It makes me a little ill to think about it.